As an employee in Kenya, PAYE (Pay As You Earn) is probably deducted from your salary every month. But do you actually understand how it works and how your taxes are calculated? In this post, we demystify PAYE and income tax so you can take control of your payroll taxes.
What Exactly is PAYE?
PAYE is a tax system where employers deduct income tax from employee salaries and benefits every month. The tax is remitted to the Kenya Revenue Authority (KRA) by the 9th of the following month.
All employers must register for PAYE and make these monthly deductions on behalf of employees. The amount deducted depends on your taxable income and the PAYE tax bands.
What Counts as Taxable Income?
Your taxable income includes all taxable employment earnings like:
- Salary, overtime, commissions, allowances.
- Bonuses, director’s fees, pension payments.
- Non-cash benefits over KES 3,000 per month e.g. company car, paid utilities.
Some income like meals up to KES 4,000 per month are tax exempt.
Maximizing Your Allowable Deductions
To lower your taxable amount, claim all your allowable deductions:
- Mortgage interest on a residential home up to KES 300,000 per year.
- Personal pension contributions up to KES 20,000 per month.
- Premiums on approved insurance policies.
Submit proof of these payments to your employer.
Know Your Tax Brackets
Here are the tax bands for employment income effective July 2023:
| Monthly Income | Annual Income | Tax Rate |
|---|---|---|
| First KES 24,000 | First KES 288,000 | 10% |
| Next KES 8,333 | Next KES 100,000 | 25% |
| Next KES 467,667 | Next KES 5,612,000 | 30% |
| Next KES 300,000 | Next KES 3,600,000 | 32.5% |
| Above KES 800,000 | Above KES 9,600,000 | 35% |
The more you earn, the higher tax rate applies on each band of income.
Claim Tax Credits
Once PAYE is calculated, reduce your tax liability using tax credits like:
- Personal relief of KES 2,400 per month.
- Insurance relief up to 15% of premiums paid or KES 60,000 per year.
Check Your Pay Slip
Scrutinize your pay slip every month to ensure accurate PAYE deductions. Notify your employer immediately of any errors.
You can also estimate your PAYE liability using KRA’s tax calculator. Understanding how PAYE works will empower you to maximize deductions, claim credits and avoid excess deductions.